Wednesday, October 17th, 2018

Options Trading Explained for Beginners

 

There are many vehicles for investing your money in order to protect your capital and make more. You may have money in a mutual fund or have purchased corporate bonds or stocks. Another possibility, for those willing to do their homework, is the kind of security called an option. This article is about options trading explained for beginners.

Options Trading Explained for Beginners: Calls and Puts

Options trading is based on the sale or purchase of calls and puts.

Calls and puts are the names for the types of contracts used to buy and sell stock, commodity, and futures options.

If you believe that a stock will go up in value in the near future you can buy a call contract on that stock. A call option gives the buyer the right to purchase the stock at a set price called the strike price. This right to purchase lasts until the option contract expires. If the stock prices goes up as anticipated, the buyer of the option contract can either of two things. He can exercise the option contract and purchase the stock. The stock will be more valuable than what he pays for it because he will pay the strike price and not the market price. The other thing he can do is sell his option contract which is now “in the money” and more valuable than when he purchased it. Thus he can use a call option to get a promising stock at a cheap price or simply profit from the price move by purchasing and then selling a call option. If the price of the stock does not go up the person lets the option expire. The cost of this opportunity is the premium paid for the option contract.

Purchasing a put gives the right to sell a stock at a set price called the strike price. The person purchasing the put will believe that the price of a stock might fall. This may be an investor who has seen the stock run up dramatically. He will want to protect his position with the put. Or a speculator may simply want to make a profit from a stock that is likely to go down in price. As with a call, the person could exercise the contract he we wants to get rid of an unwanted stock or they could simply sell the contract which is now worth money, and take the profit.

Options Trading Explained for Beginners: Buying versus Selling

The person who buys a call of put option will only exercise that option if it leads to a profit. But the seller of a put or call can find themselves in the position of making a painful trade. Over the long haul options sellers make more money than options buyers. But, there are many painful examples of options traders who lost substantial sums of money when they sold uncovered calls or puts and found themselves on the wrong side of a rally or a stock decline. Go to this link to read about various profitable options strategies..

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